Commercial banks are required by regulation to produce periodic "call" reports which summarize a bank's Demand Deposit Account (DDA), e.g., checking account, liabilities and reserve balances over a seven day period. Based on these reports, banks must set aside a tiered percentage of DDA balances and hold the funds in "reserve" at the Federal Reserve Bank. The requirement that certain funds be held in reserve, however, limits the amount of bank resources available for investment purposes, such as making loans.
With the advent of recent changes in Federal Reserve regulations, financial institutions are now permitted to "restructure" certain DDAs as "non-transaction" accounts. The restructuring is accomplished by the creation of what are commonly referred to as "sub" accounts on the liability side of the bank's general ledger system that effectively lower the balances subject to the reserve requirement. The primary advantage of lower reserves is that it frees up a percentage of these funds to be used by the commercial bank for additional lending and other revenue-generating activities.
The accounts into which money is "moved" from the DDA may be referred to as the "sub-DDA" and the "sub-MMA" (Money Market Accounts), the sum of the sub-DDA and sub-MMA balances equaling the DDA balance. The average balance maintained in a sub-MMA represents the average amount of funds not subject to reserve requirements, a portion of which are available to the bank for investment purposes. By retaining a "threshold" balance in the sub-DDA, any excess funds over the threshold amount can be moved into the sub-MMA, thereby effectively lowering the balance on which the reserve requirement is calculated. This technique of accounting presents no impact to the bank customer, however, because the DDA ledger balance is not altered in any fashion.
Because sufficient funds must always be maintained in the sub-DDA to satisfy customer demands, a determination of the proper threshold for a DDA requires an analysis of the history of account activity. If the sub-DDA balance becomes less than or equal to zero, then sufficient funds should be "swept" (i.e., moved) from the sub-MMA to the sub-DDA as necessary to bring the sub-DDA balance up to the original threshold.
Current regulations limit the maximum number of sweeps to six per month. Once six sweeps are incurred, the customer account can only show funds in the sub-DDA account and the sub-MMA is effectively cleared to zero; i.e., if a sixth sweep is required, all funds in the sub-MMA must be swept into the sub-DDA to avoid exceeding the sweep limit, regardless of the threshold selected. The sweep counter is reset to zero at the beginning of each calendar month and a new sweep threshold, based on the prior month's account activity, is recalculated, with excess funds (i.e., funds exceeding the sweep threshold) in the sub-DDA being moved into the sub-MMA account. Optimizing the sweep threshold for each DDA allows a bank to maximize the average sub-MMA balance, thus minimizing the funds in the sub-DDA that are subject to reserve requirements and enhancing a bank's investment opportunity.
The difficulty for any commercial bank in optimizing the sweep threshold for each DDA is in determining the precise sweep threshold that should be set, either for the bank at large, the sub-product (account type) level, or the account level. Setting a generic threshold dollar amount for the bank, or accounts within a particular sub-product group, may not adequately reflect the debit activity affecting an individual account and may thus not be the optimal threshold for all accounts. For example, if the predetermined sweep threshold is too low, then a DDA may reach the maximum of six sweeps too early in the month; any future deposits that occur later in that month could not be moved into the sub-MMA. This presents an opportunity loss for the bank as the customer account has already reached the maximum number of sweeps allowed by regulation much too early within the calendar month. Similarly, if the threshold is set too high, then few, if any, sweeps will occur. This means that there are excess funds in the sub-DDA that could have been, but were not, moved into the sub-MMA. This situation also presents an opportunity loss for the bank as it must continue to maintain reserves on the sub-DDA portion of the account.
Therefore, what is needed in the art is a system and method for determining optimal sweep threshold parameters for DDAs.